John T. Floyd is Board Certified in Criminal Law by the Texas Board of Legal Specialization. He has over twenty years’ experience representing individuals and business under investigation by state and federal authorities for financial crimes, including securities fraud, and other regulatory violations that include the possibility of criminal sanctions.
The securities industry in Texas is governed by the Texas Securities Act. Regulations for the securities industry are located in Title 19 of the Texas Civil Statutes, more commonly known as the Blue Sky Law.
The term “security” is considered a “term of art” under the law.
Texas Securities Fraud
It is a felony to engage in fraud during the course of selling, purchasing, or inviting people to sell or purchase securities. Under Texas law, a traditional security is an investment medium where the purchase money for an ownership interest in an enterprise is used by the enterprise to make money without significant participation by the purchaser.
Most often the term security simply means either an ownership in a company, such as a stock, or loaner’s interest in either a company or a public project, such as corporate or municipal bonds. There are also securities relating to the right to collect revenue from a mine or oil rig.
Securities in Texas
“The term ‘security‘ is defined broadly to include a wide array of investments such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts. Generally, an “investment contract” is created when a person invests something of value (usually, money) in a common enterprise with the expectation of a return (e.g., dividends or increased capital) to come through the managerial efforts of someone other than the investor.”
The definition of “security” found in Section 581.4(A) of the Texas Securities Act does not include every form of security that may exist. A security may exist, therefore, even if there is no written document.
Art. 581.4(F) defines “fraud” under the Texas Securities Act to include “an intentional failure to disclose a material fact.”
Fraud and Material Facts
Neither Texas law nor federal law defines the term “material fact.” The U.S. Supreme Court dealt with the Securities Exchange Act and found that “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
Texas courts follow this definition of materiality. Kirk v. State, 611 S.W. 2d 148, 151 (Tex. App. – El Paso 1981, no writ).
There are five common acts leading to prosecution for securities fraud in Texas:
- The sale of unregistered securities,
- The sale of securities by means of misrepresentation or omission of material facts,
- The purchase of securities by means of misrepresentation of material facts,
- The sale of securities by means of false or misleading prospectus materials, and
- The sale of securities by unregistered sales person.
These allegations generally fall into three main types of criminal security fraud in Texas:
- Fraud by a Company – company misrepresent;
- its financial information, such as misrepresenting the worth of its stock;
- Insider Trading – an individual who actually uses inside information about a company to entice someone to buy or sell stocks. It does not matter if the information is true or not.
- Third Party Misrepresentation – an individual misrepresenting information about a third-party company for the purpose of getting people to invest in the company, and once the stock is high enough, the individual will sell the stock for profit.
Statute of Limitation in Securities Fraud Cases
There is a five-year statute of limitation under Texas’s securities fraud law from the date the offense was committed. This time includes the last act in committed in furtherance of the fraud. An individual cannot be charged if the State does not present an indictment within the prescribed time limitation.
There are many factual and legal defenses that can be raised when confronted with a securities fraud charge. They include, but are not limited to:
- Lack of knowledge,
- The high managerial agent of the corporation performed their due diligence to ensure that securities fraud was not committed,
- The agent was a registered dealer or agent in the security,
- Entrapment, or
- No one acted on the disclosed unlawful information.
Jurisdiction of State Securities Board
The law permits the State Securities Board of Texas to conduct investigations into the sale of securities, notes, limited partnership interests, commercial paper, oil and gas investments, and investment contracts. It is the Board’s responsibility to detect and prevent violations of the Texas Securities Act, such as frauds involving the sale of securities and investments.
If the Board determines that criminal wrongdoing has occurred, it can refer the case to the Texas Attorney General Office for civil action or to the local district attorney or the U.S. Attorney’s Office for possible criminal prosecution.
Elements of State Securities Fraud
The elements the State must prove to establish a securities fraud conviction under the Texas Securities Act are:
- A material representation of fact;
- That representation was false or untrue;
- The defendant either knew the statement was false or recklessly made the statement as a positive assertion without knowledge of its truth or falsity;
- The defendant made the statement with the intent that it be acted upon by the other party;
- The other party actually took action in reliance upon the defendant’s misrepresentation; and
- The relying party suffered injury from its action in reliance on the false statement.
Range of Punishment in Securities Fraud Cases
- Third degree – the offense involves $10,000 or less, and is punishable by a two to 10-year prison term and/or a fine up to $10,000;
- Second degree – the offense involves $10,000 or more but less than $100,000, and is punishable by a two to 20-year prison term and/or a fine up to $10,000; or
- First degree – the offenses involves more than $100,000, and is punishable by a life sentence or for not less than five or more than 99 years in prison and/or fine up to $10,000.
Failure to Comply with Cease and Desist
If a defendant has been issued a “cease and desist” order that they stop performing fraudulent activities dealing with securities and violates that order, he or she may be charged with a state jail felony which is punishable by a jail term up to two years in a state prison and/or a fine up to $5,000.00.
Fraud charges dramatically impact an individual’s professional reputation and business, his personal and family life, and poses a real threat to a serious prison. If you or someone you know is under investigation or has been charged with securities fraud you need an experienced criminal defense lawyer who has successfully represented clients in investigations conducted by the Texas Attorney General’s Office and the State Securities Board.
Contact the John T. Floyd Law Firm today to schedule a consultation.